Cuts To Your Workforce Will Have Lasting Consequences Long After Any Recession Is Over
If the past few months are anything to go by, 2023 could be a bad year for employment. In just the past few weeks, we’ve seen a tidal wave of layoff announcements from major employers like Amazon, Microsoft and Google. Though tech seems to be the epicenter of layoffs right now, we’re seeing major banks and retailers laying staff off as well.
For now, hiring at other companies is more than offsetting these job losses. But if the forecasts for 2023 are correct, that won’t last long.
At the heart of this apparent wave of job losses is the Federal Reserve’s battle against inflation.
Over the past year Fed chairman Jerome Powell has raised the target overnight rate from a range of 0-0.25% to 4.25-4.5%, in one of the fastest and steepest rate-hiking cycles in history.
And in public comments, Powell has made it clear how he plans to judge success: In his view, employment in the U.S. is too strong, putting upward pressure on wages and therefore inflation. By one estimate, the U.S. would have to lose 1.2 million jobs to get to where the Fed wants the economy to be. (The fact that wage inflation is slower than overall inflation, meaning employees are losing purchasing power, doesn’t seem to figure much into Powell’s thinking.)
So success, in Powell’s view, means fewer people working.
Powell’s aim to fix inflation by raising unemployment is especially strange
considering what the Federal Reserve’s job is. Unlike many other central banks – whose only mandate is to keep inflation low – the Federal Reserve actually has a dual mandate: To keep prices stable and to maximize employment.
In other words, Powell’s goal of raising unemployment actually goes against the Fed’s explicit orders to maximize jobs. But the Fed is taking this approach – and has, in fact, taken this approach for a long time – largely out of a desire to appear “pro-business.”
It’s Easier For The FED To Target Employment
There are many benchmarks in the economy that the Fed could use to measure its fight against inflation. It could, for example, target corporate profit margins. Shrinking margins are a sign of disinflation.
It could target corporate assets – shrinking balance sheets are also a sign of lower inflation ahead. But if Powell were to come out and say “We won’t drop interest rates until profit margins have shrunk by half,” he would cause panic in the stock markets. The last thing investors want to hear is that government policy is to chop their dividends in half.
So, from the Fed’s perspective, it’s simply easier – and better for Jerome Powell’s own stock portfolio – to target employment.
Unfortunately, in this day and age, attempting to create higher unemployment could prove to be as “anti-business” as insisting on lower profit margins.
The Long Term Risk of Firing Employees
The U.S.’s labor force participation rate – the share of the population with a job – fell from 63.3% before the pandemic, to 62.2% today. Given the size of the U.S. labor force, that’s some 2.7 million people who left the workforce during the pandemic and never came back.
In this environment, businesses that get rid of talented, valuable workers run the risk of having to replace them, eventually, with less skilled and talented employees – and at higher wages. Not to mention the brutal hit to morale that haunts businesses after layoffs.
In other words, Powell’s eventual victory over inflation could be pyrrhic, with long-lasting damage to businesses and the broader economy.
Companies could lose a great deal of their institutional experience and know-how. That inevitably will hurt productivity, and as any economist will tell you, productivity growth is the only thing that generates real increases in wealth over time.
Shared Sacrifice Pay Cuts - Your Employees Maybe More Willing Then You Think
According to the Harvard Business Review 9 out of 10 people would be willing to take a pay cut or be paid less to do more meaningful work.
This is a fascinating observation and if you are a business owner who is conscious of your employees well being and those employees dependents, this statistic should come as somewhat of a relief.
It means that firing is not the first and only option and it also implies that doing so is not the best business practice in the long run vs having to rehire and train when the downturn disappears. Creating a sense of shared responsibility or mission within your work environment creates meaning even if the actual work of your employees may be mundane.
This can not be emphasized enough: The sense of meaning is even more potent when employees observe that their managers or CEO's are doing everything they can to keep them employed, especially when other companies around them are firing by the thousands. You will not only have managed to keep employees but have also acquired an
...army of loyal, dedicated and driven individuals who are emotionally and idealistically committed to the success of your company.
Managers With Emotional Intelligence
Research shows that managers – that thin line between “doers” and executive decision-makers – are the key to maintaining a productive and happy workforce. Businesses with bad management tend to suffer more from high turnover, skills shortages and operational disruptions.
To minimize the damage from losing staff, teach managers to make emotional connections with their staff.
Offer courses and professional development tools that help them develop the people skills needed to make sure staff feel wanted and valued, and therefore remain productive. Equally importantly, reduce stress on managers by taking mundane administrative tasks off their hands (after all, that’s what HR is for), allowing them to focus on people and problems.
Do this, and even if your business is forced into layoffs, you will still find yourself in a better position than your competitors when it comes time to grow again.
Get Rid Of Redundant Software And Other Automatic Expenditures
You may be licensing Zoom for business meetings, but did you know that Slack also has a video-call feature? For that matter, so does Google/Gmail. Your tech support department might be using a Jira ticket board to keep track of assignments, while your sales department keeps track of work through Trello. Guess what? These apps do the same thing. You don’t need to pay for all of them.
In recent years, SaaS (software-as-a-service) startups have convinced businesses their “unique” products are indispensable, when, in fact, there are countless (often free) alternatives.
Similarly, your business might be subscribed to all sorts of services – industry newsletters, catered lunches, yoga instructors – that you don’t actually need, when push comes to shove.
Take A Look At Your Real Estate Costs
In the post-pandemic era, far more work is being done from home than was the case before. Do you actually need space for a desk for every employee? Maybe you can make do with half as much space and shared desks. Need to expand office space? Renting a corner of a work-share office might be cheaper than signing another lease.
Consider a sale-leaseback, where you sell your office space to an investor and lease it back from them.
This will give you a large chunk of cash to put towards retaining staff and maintaining operations during hard times.
Sale-leasebacks can also work with other forms of capital. For example, you might be able to sell your fleet of trucks and rent them back from the new owner.
Use the Pareto Principle
The Pareto Principle states that, for many outcomes, roughly 80% of the result comes from 20% of the causes. Applied to business, this means only about 20% of the work and investment in your company produces 80% of your profit. Knowing this, ask yourself: What could we do less of, while still maintaining most of our revenue? You will likely find all sorts of expenses and activities that have little to do with the company’s bottom line.
Employees Are An Investment - Cashing Out Over Temporary Imbalance ?
Eventually "this too shall pass" and the economy will be back on track in some form or another. The fight for talent hiring will be on and having not fired employees in the first place will put you ahead of the game and additionally, which is probably most important of all, your employees will be loyal, committed and dedicated from having stuck by them during this period when other companies threw their employees to the wind and fired by the thousands.
Sources:
Federal Reserve - News Events
The Conference Bored
CNN - Economy
Federal Reserve - Monetary Policy
Federal Reserve - FMOC Statement
Harvard Business Review
Better Explained - Understanding The Pareto Principle
Harvard Business Review - What Companies Still Get Wrong About Layoffs
